One of the news longer announced in the world economic occurred yesterday: the rise in interest rates from the Federal Reserve (Fed) in the united States. It is the second rise post-2008 crisis and post – “era of 0% rate”, but is expected to occur well before this year. While it was expected, the political context in which it is given —Donald Trump elected president of the united States— opens a space of “uncertainty”, as stated by the own president of the Fed, Janet Yellen.
And if there is something you don’t like to investors is the uncertainty. This is what can generate a greater impact on Uruguay, as the increase of the rate a quarter point to 0.5%-0,75% (see graph), was discounted by the market. Following the decision, Yellen said that the central bank was, at the margin, adapting to Trump because “some of the participants,” the committee that decides on the rate (FOMC, for its acronym in English) began to change the assumptions of fiscal policy.
“We are operating under a cloud of uncertainty (…) All the participants of the FOMC recognize that there is considerable uncertainty about how it could change the economic policy and what effects it could have on the economy,” said Yellen.
The Fed now sees three hikes in rates in 2017 in front of the two that envisaged in September. Yellen considered it to be a “fit very modest” due to the solid gains in employment, the evidence of inflation accelerated and the expected impact of the policies of Trump.
The markets reacted with the main indicators of the New York Stock exchange in the drop (of 0.6% in the Dow Jones and 0.5% in the Nasdaq), the dollar strengthened to a maximum of 10 months against the yen and advance versus other major currencies and bond yields of the U.S. increase.
The “federal funds rate” determines the price of money, in this case the us dollar. A raise in the rate would generate a rise in the dollar, although as was expected and as the dollar had increased, the factor behind the strengthening of the greenback was the biggest expected rate of adjustments for the coming year and the statements of Yellen.
Uruguay.
immediate level, the analysts consulted by The Country agreed that there will be no major effects on Uruguay. For 2017, the story can be something different.
“In the immediate present, there may not be a significant effect to the upside on the type of change, because we are going through a time where there is usually a seasonal increase in the demand for pesos, added to the supply of dollars by the tourist season,” said the economist of KPMG, Marcelo Sibille.
To the senior manager, Financial Advisory at Deloitte, Tamara Schandy, “the most novel feature was the change of signal to a path up to the future slightly faster than before.” A Fed moving the rate in a more agile way can mean an environment of a stronger us dollar in the world and an environment of interest rates in dollars higher, that cost more, the financing for the emerging economies (such as uruguay) and that it can potentially intensify a change of portfolio, involving capital outflows from these markets”, he said.
Although, nuanced to explain that “the change of the signal was limited and for now the path is announcing the Fed is very gradual, so it is not a change to a very different scenario” to the one intended.
In the same sense, the economist CPA Ferrere, James, Rego noted that “before this meeting, the members of the Fed indicated that during 2017 the rate would increase 50 basis points, while today indicated they expect to rise a bit more intense (75 basis points) for 2017. This would confirm that the financial transition would occur more rapidly than what was expected some months ago. This implies higher interest rates and stronger dollar globally.”
Sibille in the meantime, he said his expectation “remains that of an increase in the exchange rate (in Uruguay) during 2017. To the extent that this expected increase does not have a incidence marked on the inflation, this will imply an improvement in the competitiveness of the export sector”.
Meanwhile, the partner of Vixion Consultants, Aldo Lema said that the raise in the rate was already “internalized”, added that “the message regarding the speed of adjustment and target rate, was not a big change” and that “nor changed mostly the level in the long run: the (rate of interest) neutral is seen in 3% instead of 2.9%”. For this reason, “are not to be expected big impact on the dollar at the local level,” said Motto. Your value, “will continue to depend upon other grounds, among which are the behavior of global and regional currency, the terms of trade and the prospects for reviving local”, he added.
The why of the adjustment.
The Fed can lower the rate to stimulate spending and investment in order to boost the economy (which it did from 2007 to bring it to 0%, see graph), or to increase them in order to avoid an overheating of the economy, or accelerating inflation (what you are doing dimly now). In fact, the Fed now sees growth slightly faster, lower unemployment and an inflation rate just under his goal of 2%. The low rates provided the credit in the american economy, by stimulating mainly to key sectors such as real estate and automotive. To lead the capitals to emerging markets (which give better yields) which lowers the financing of those countries. With information from AFP AND REUTERS
Trump and change to rising fast.
The government of the republican Donald Trump in the united States would add more authorities favourable to the restrictive monetary policy (higher rates) to the ranks of the Fed, which could alter the tilt blast of the body and turn the fragile consensus on the path of increments of rates. The president-elect shall be two vacant sites on the panel that decides the monetary policy of the Fed starting next month and is expected to choose officials inclined to monetary tightening accelerated. In addition, Trump possibly nominate for the approval of the Senate, the successor of the president of the Fed, Janet Yellen, in 2018, a decision that has already given rise to speculation about the candidates. All of this generates more uncertainty.
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